Why Money Still Matters

Why Inflation Never Came A generation of economists and students of macroeconomics were taught that the Quantity Theory of Money described the relationship between money and prices in the economy. The primary equation for the Quantity Theory of money is:Where: is the total amount of money in circulation on average in an economy during the period, say a year. http://www.financialjuice.com/News/108633/Why-Inflation-Never-Came.aspx

When it comes to the creation of money in China, and specifically the asset side of the ledger, or loans, there is much more confusion than consensus, primarily because nobody knows who it is that is creating the money: private or public entities, SOEs, the PBOC, regional banks, shadow banks, or your next door neighbor.

“Cash is king,” was once the old saw. The saying became passé in boomtime. Nobody wanted to hold on to cash. There were stocks and real estate to buy, not to mention big screen TVs and granite counter tops. Besides, the PhDs at Federal Reserve stay up late at night figuring out how to make money less valuable. Ben Bernanke and his colleagues keep printing the stuff to solve what they fear the most: insufficient aggregate demand and liquidity traps.

He has what seems like the easiest job in the world. He manages $4 billion of assets on which he earns fees. And all he does is buy US Treasuries. His name is Van Hoisington. No man has been more right about interest rates in the last two decades. Van thought they would go down — and has thought so since 1990. So they have. As they fell, the value of Van’s bonds rose. Since he’s been right, his track record is ridiculously good. He has posted a 9.1% annualized return over the last ten years…in a bond fund!

EVERYONE needs to save. People need to be able to cover unexpected expenses and income reductions, to say nothing of retirement. To accomplish this, we buy equities and bonds, hoard gold coins and physical currency, open bank accounts, accumulate real estate, purchase insurance coverage, and even stock up on canned food. All of these savings vehicles help us hedge out different risk exposures we face in our daily lives.

James Cordier submits:As I watched stocks collapse to new 2010 lows last week, I was amused to observe all of the TV “analysts” from daytime fund managers to nighttime TV stars talk about which stocks are at good “value” levels now and where you should be buying. Buy low and sell high. It all seems so 1990’s in today’s investment environment. Buy low and sell high only works if asset values are moving up.

A number of readers wrote me this morning and asked what I thought of Paul Krugman's column today.  Krugman writes:

By David Beckworth: My initial reaction to the FOMC decision last week was disappointment. That has not changed, but after reading other observations and thinking about it some more I am now disappointed for other reasons.